Better Buy: Cubist Pharmaceuticals, Inc. vs. Durata Therapeutics, Inc.

Regulatory decisions are generally chaotic events for biotech companies, especially when they involve a lead clinical candidate. Approvals can send shares soaring as the market prices in future revenue, whereas a rejection nearly always results in a dramatic drop in share price. Given the bipolar nature of regulatory decisions for biotechs, it's key to understand the risks relative to rewards associated with a company ahead of the event. With that in mind, here is a Foolish comparison of two biotechs, Cubist Pharmaceuticals  (NASDAQ: CBST  ) and Durata Therapeutics  (NASDAQ: DRTX  ) , with imminent regulatory reviews for their antibiotics with the U.S. Food and Drug Administration, or FDA.

Cubist Pharmaceuticals and Durata Therapeutics both face the FDA on March 31
In an odd turn of events, both Cubist and Durata will go before Advisory Committees for their respective antibiotics, indicated as potential treatments for gram-positive skin infections, on March 31. Because of the marked increase in serious skin infections stemming from antibiotic resistant bacteria such as Staphylococcus aureus (MRSA), the Centers for Disease Control (CDC) has stated that there is an urgent need to develop new antibiotics to fill this unmet medical need. According to the CDC, 2 million Americans per year are infected with antibiotic resistant bacteria, resulting in approximately 23,000 fatalities. And the problem is only growing worse.

Cubist offers tedizolid phosphate
Cubist's antibiotic candidate is tedizolid phosphate, which was acquired from Trius Therapeutics in 2013 and will be marketed by Bayer AG outside of the U.S. Tedizolid met both its primary and secondary endpoints in two late-stage trials and is presently under review as a treatment for acute bacterial skin and skin structure infections (ABSSSI). Tedizolid will also enter mid-stage trials this year as potential treatment for hospital-acquired/ventilator-associated bacterial pneumonia. Based on Cubist's prior successes with the FDA, tedizolid's strong late-stage trial results, and the clear need for new antibiotics, I think tedizolid will receive a positive vote come March 31. A final decision for tedizolid is set for June 20, which is the drug's scheduled Prescription Drug User Fee Act, or PDUFA, action date 

Durata offers dalbavancin
Durata's candidate is the storied dalbavancin. Durata was launched in 2009 specifically to raise money to acquire the broad spectrum antibiotic from Pfizer (NYSE: PFE  ) . Pfizer acquired the drug in a whopping $1.9 billion deal for Vicuron Pharmaceuticals in 2005, but was unable to monetize dalbavancin for reasons that remain somewhat fuzzy to this day.

After acquiring the drug from Pfizer, Durata initiated the requisite clinical trials necessary for a regulatory filing in the U.S. and Europe. In 2012, the company reported that dalbavancin met both its primary and secondary endpoints in multiple late-stage trials and subsequently filed for regulatory approval. So, despite a meandering clinical and regulatory history, my view is that dalbavancin will also likely be approved as a treatment for ABSSSI before or on May 26, the drug's scheduled PDUFA date. 

Foolish comparison
While this comparison seems unfair given the dramatic difference in market cap between the two companies, I believe you can consider which company offers the most potential upside for the least amount of risk. Viewed this way, I think the bigger biotech, Cubist, is the clear winner. Even though both stand a good chance of gaining approval for their respective antibiotics, my opinion is that Durata will have a much tougher go on the commercialization front. And will likely have to resort to significant dilutive financing to help raise the funds necessary to create a commercial infrastructure. Cubist has the marked advantage of already being a market leader in the antibiotic field with its blockbuster Cubicin, and thus having significant cash flow that can be used to help launch new drugs. All told, Durata simply can't offer investors this margin of safety. 

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  • Report this Comment On March 26, 2014, at 3:16 PM, Vettedls wrote:

    Nice little article George until you reach your conclusion. The data you present seems to be accurate and both these companies are set to appreciate if the FDA gives the thumbs up. This is not always based on science as the FDA is as much a political machine as any other federal agency. That said, the world in general and the US being its most wealthy nation are desperate for new antibiotics.

    Who knows what will happen with the FDA but if both companies get their drugs approved, why should Cubist be in a better position to profit. The smaller cap company in theory is less valued by the market but now (assuming approval) both are poised to generate big profits. In my opinion, small caps tend to appreciate more when something "big" happens. The supposition that Cubist is in a better position to get their drug to market quickly is not backed up with anything other than opinion and so it is no more valid than my opinion. While it may seem to make since that a larger cap company has better access to markets, the reality is that many of these micro-cap biotechs, simply license their technology to a big drug producer or they outsource the production while keeping full rights. The big hurdle is FDA approval, not production and marketing.

    I'd say either one is a decent speculative play and perhaps one should own both but I don't buy your argument that Cubist has the most upside based on the premise that they can get their drug to market faster and thus generate more profitability for shareholders. Its simply much too complicated to jump to that conclusion.

    Long DRTX. Considering being long CBST within 72 hours.

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